HONG KONG - A Hong Kong tribunal is expected to decide within three months whether a Moody's Corp report on Chinese companies broke Hong Kong's securities law, after concluding a three-day landmark hearing on Saturday.
Ratings agency Moody's Investors Service was contesting a Hong Kong securities watchdog's US$3 million (S$4.2 million) fine for a July 2011 report that raised corporate governance concerns over 49 Chinese companies, contributing to a fall in their share prices.
The Securities and Futures Commission's (SFC) fine is the first disciplinary action taken by the regulator against a credit rating agency since the activities of such firms became directly regulated by the SFC in June 2011. If the fine stands, it could have major implications for the types of services credit rating firms are able to offer in the financial centre.
In a statement after the Saturday hearing before Hong Kong's Securities and Futures Appeals Tribunal, Moody's said: "If the SFC's Enforcement Division prevails, its actions will set a dangerous precedent that will chill debate in Hong Kong." The SFC alleges Moody's broke the regulator's code of conduct by publishing what its counsel Benjamin Yu described on Saturday as a "half-baked" idea that had not been properly tested and which contained mathematical and input errors.
The "shoddy and unprofessional" work fell short of the SFC's due diligence and control requirements, Yu said.
The ratings agency's so-called "Red Flags" report devised a framework for identifying governance and accounting risks when investing in emerging market fixed income securities.
Moody's disputes the SFC's power to sanction it in this instance and argued the report merely offered a useful "screen"for analysing Chinese companies and was thus not part of its credit rating activities and not within the SFC's jurisdiction.
Moody's counsel Adrian Huggins also contested the proportionality of the fine, arguing that while the mistakes were regrettable they "did not have a material impact on the overall accuracy of the report." "I hope the worst that we could be accused of is that we have behaved carelessly," said Huggins in his summation.
If the tribunal rules in favour of Moody's it may reduce the proposed fine or scrap it entirely. If the SFC prevails, Moody's can pursue an appeal through the Hong Kong courts.
A Moody's spokesman declined to comment whether it would pursue a further appeal if the tribunal rules against it.